Friday, June 29, 2007

The 10-year T-note fell this week all the way to 5.05 percent from its 5.26 percent top two weeks ago. Long-term mortgage rates have settled today near 6.75 percent.

The interest rate decline has had several contributors. In approximate order of importance: fear of default on widening classes of ill-advised debt has pushed money to high-quality paper; a "retracement" from the crest of a big move is normal; and gradually improving inflation data are tilting the Fed from a tight stance toward balanced.

Lastly, regarding an accelerating U.S. economy: wait a minute fellas. Home sales are still falling, and unsold inventories are up to 8.9 months' supply, a 15-year record. Weakness in both consumer confidence and orders for durable goods put the second half of 2007 in question for anything much beyond 2 percent GDP growth.

Everyone is trying to form a housing forecast: how long, how deep, how bad will the collateral damage be? That is, everyone except for those who participated in the Great Derivatized Mortgage Train Robbery, who are doing their level best to keep everyone confused.

The forecasters have run out of metaphors. I'm waiting for these headlines: "Canary Found Dead in Iceberg," followed by "Tip of Coal Mine Feared." Meanwhile, the cover-uppers are selling a variety of urban legends and Tales of The West.

Legend Number One: Loosened standards in late 2005 and 2006 are responsible for the subprime damage, which will be limited to those loans. This is nonsense. We (and all other retailers) were offered the first suicide loans back in 2000, which then and now fall into two generic groups: 100 percent loan-to-value ratio in any form, with or without borrower documentation, and adjustable-rate mortgages with last-cigarette adjustment structure. The roll-out of these loans coincided exactly with Wall Street's discovery of "credit derivatives."

The ultimate foreclosure damage was masked by a decline in interest rates to a 50-year low, and a roaring, self-reinforcing run-up in home prices.

Legend Number Two: Fraud by Main Street lenders has been the main problem. It is a problem; it has always been a problem, and its depth is always discovered when home prices go flat. In today's parade of mortgage horrors, fraud is not even a secondary cause. Rather, the authentic causes (back to those two generic loan types) are: if you have no equity at purchase, and prices go flat, and anything goes wrong in your household, you're cooked. Prices went flat in 2005; that's the problem in '05-'06 loans, not easier credit.

Then there are the ARM-structure effects. In 2006, the Fed took short-term rates from the 1 perent bottom in 2002-2004 to 5.25 percent. ARM indices follow the Fed: in 2002-2004 a subprime borrower adjusting to 5 percent over Libor at the end of year two or three (the despicable "2/28s and 3/27s") only went to a 6 percent or 7 percent pay rate. Now, it's to 10 percent or 11 percent, a disaster having nothing to do with "eased standards" in 2005 and 2006 originations.

Tales of The West

Tale Number One: Housing will bottom out when home sellers finally reduce their prices enough. We better hope not because that would extinguish the equity in another 15 percent of households beyond the 15 percent that have little or none now.

Tale Number Two: Workouts, or negotiated loan modifications, will control the foreclosures. Foreclosure hotlines and counseling are doing excellent work, saving many families, but there is little negotiating room. One classic workout: add delinquent payments to the mortgage. It works if there is equity, but without any, the borrower is toast. Another is rate-reduction, which worked beautifully in the '80s (the FHA and VA "streamline refi") to rewrite 14-15 percent loans down to 8-9 percent. However, rate-reduction requires a lower market-rate world; today, rates are far higher than when the suicides were assisted. It may be possible to rewrite sky-high ARM adjustments, but only at the cost of deepening panic in the credit markets and cash flow collapsing. Take your poison, indolent regulators.

The next canary to hit the iceberg: S&P and Moody's are soon to be exposed in the worst systemic rating error ever. They are going to have to re-rate hundreds of billions of new-age mortgage paper, forcing institutions to acknowledge losses beyond estimation, and in doing so will admit their own fiduciary failure: fee for blindness.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

The century-long quest of Americans to live in perpetual sunshine and far from snow shows no signs of letting up as surging growth infuses Sun Belt cities with new residents.

The Census Bureau reports today that seven of the 10 most populous U.S. cities are within 500 miles of Mexico. In 1910, all 10 of the biggest cities were within 500 miles of the Canadian border. The once-dominant industrial cities of Cleveland, Pittsburgh and Buffalo find themselves smaller than Mesa, Ariz., and Fresno.

The big exception to the smaller gains outside the Sun Belt is the Big Apple. New York City ranks No. 1 in attracting new residents since 2000, adding nearly 206,000 people. That's more than Phoenix, Houston or Los Angeles gained. Of the 35 cities that added the most population, New York is the only one not located in the South or West.

Economic prosperity and the arrival of new immigrants, who have higher birth rates than the overall population, are driving the city's growth. "It's written into the DNA of New York that immigrants are welcome," says Warren Brown of the Cornell Institute for Social and Economic Research.

FIND MORE STORIES IN: Phoenix | Manhattan | Getty Images | Sun Belt | Gilbert | Big Apple | Empire State Building | Stan Honda In a change more symbolic of national population trends, Phoenix has supplanted Philadelphia as the nation's fifth-largest city, according to Census estimates for July 1, 2006.

"It's hard to think of the cradle of liberty being overtaken by a rough-and-tumble, independent Western town, but that tells you something about the nature of our country," says Brookings Institution demographer William Frey. "We're a country that's always seeking new horizons."

The explosive growth in parts of the South and West has created boom cities that many people have never heard of. Gilbert, Ariz., a Phoenix suburb, has been adding more than 1,000 people a month for five years and had a population of 191,517 last year.

"It's fun. It's exciting to be growing this fast," says Gilbert Mayor Steve Berman, who moved to town in 1981 when the population was 4,000. "We're creating the coolest place to live."

By contrast, Green Bay, Wis., (100,353) has been losing population.

"We don't want to fall below 100,000," says Green Bay City Council President Chad Fradette. "That has a little prestige with it."

Other findings:

•Hurricane Katrina. New Orleans lost 261,286 residents from 2005 to 2006, dropping its population to 223,388 after Katrina. Gulfport, Miss., lost 7,988 residents to drop to 64,316.

•Suburbanization. Only 27% of Americans live in cities of 100,000 people or more, down from 27.5% in 2000, according to a USA TODAY analysis.

Wednesday, June 27, 2007

Declining interest rates weren't enough to inspire home purchases or refinancings last week, the Mortgage Bankers Association reported today, as loan applications were down again.

The market composite index, which measures total home loan volume, fell 3.9 percent on a seasonally adjusted basis from the week before.

Home purchases saw the steepest drop-off in activity, as the purchase index sank 4.9 percent from the week before, following a 3 percent decline at mid-month. The index that tracks refinancings was down 2.5 percent last week, following a 4.2 percent drop two weeks ago.

The large decrease in purchase loans boosted the refinance share of mortgage applications to 38.7 percent last week and hiked the adjustable-rate mortgage (ARM) share to 20.4 percent.

Borrowing costs were either static or lower in the latest survey, with the average contract interest rate on 30-year fixed-rate mortgages holding at 6.6 percent, the average rate on the 15-year fixed-rate loan sinking to 6.24 percent from 6.28 percent, and the one-year ARM diving to 5.51 percent from 5.7 percent.

Points, or loan-processing fees expressed as a percent of the total loan amount, averaged 1.54 on the 30-year loans, 1.41 on the 15-year, and 1.14 on one-year ARMs. These points include the origination fee and are based on loan-to-value ratios of 80 percent.

The Mortgage Bankers Association survey covers approximately 50 percent of all U.S. retail residential mortgage originations, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts.

Tuesday, June 26, 2007

WASHINGTON (Reuters) - Sales of new U.S. homes fell 1.6 percent in May to a lower-than-expected level while prices climbed from April, according to a government report on Tuesday that continued to point to weakness in the housing sector.

New single-family home sales fell to an annual rate of 915,000 from a downwardly revised rate of 930,000 in April, the Commerce Department said.

Analysts polled by Reuters were expecting May sales to fall to a 925,000 unit pace from a previously reported rate of 981,000 units in April.

In May, the median sales price of a new home rose 1.5 percent to $236,100 from $232,700 in April. Last month, new homes prices took a record tumble while sales rose strongly.

There were 536,000 new homes for sale in May, a fall from the 542,000 reported in April. It would take 7.1 months to clear that inventory at the current sales pace, more than the 7.0 months recorded in April.

U.S. Treasury debt prices and the dollar were little changed after a mixed batch of data, which in addition to the new homes report included news consumer confidence fell to a 10-month low in June while a manufacturing index of the Richmond Federal Reserve rose sharply in June from May.

Federal funds rate futures showed perceived chances of a Fed rate cut by year-end were slightly trimmed after the reports.

Tuesday's data came a day after another key report that measures the pace of existing home sales -- which represents 85 percent of the housing market. May home resales slipped to their lowest level in four years while the overstock of homes rose and prices dropped from their year-ago level for the 10th straight month.

New home sales were mixed across the regions, with the Midwest reporting the largest gain of 31 percent while the Northeast saw an 11 percent drop. The South saw a 7.3 percent drop while the West saw a decline of 1.9 percent.

Thursday, June 21, 2007

WASHINGTON (Reuters) - Although existing homes are selling at their slowest pace in four years, most Americans are confident their homes are worth more now than they were a year ago, according to a survey released on Thursday.

A poll conducted by the Boston Consulting Group found that 55 percent of Americans believe their house would sell for more money now than last year, compared with 59 percent who felt the same way last summer. Eighty-five percent expect their home to be worth even more in five years than it is now.

"It's a reasonable expectation. Markets neither boom nor bust forever," said David Berson, the chief economist with mortgage finance company Fannie Mae. "We're in a down period now, and I don't think it's going to end any time soon, but it will end long before five years is up."

Homeowners remain optimistic even though existing home sales last month hit their lowest rate since June 2003.

National surveys of home prices seem to bear out at least a degree of optimism, showing prices still rising, if only slowly.

According to the Office of Federal Housing Enterprise Oversight, the average U.S. home price rose 4.3 percent over the year ended in the first quarter, the smallest gain in nearly a decade.

While record rates of homes entering foreclosures and weak sales figures have troubled analysts, 63 percent of the 1,007 homeowners surveyed still see real estate as a solid investment.

The softening housing market also appears to have had little impact on spending behavior. Seventy-six percent of participants in the nationwide telephone survey say it hasn't affected their spending at all.

"Talk of declining average values of homes is not forcing a cutback in spending," Michael Silverstein, senior partner at Boston Consulting, said in a statement. "It's just not translated into the American psyche."

Still, the survey, which was conducted between May 31 and June 3, showed concern among nearly half the participants that declining housing prices are hurting the national economy.

Most predict the slump will last two years. Even so, 69 percent of homeowners interviewed anticipate renovating their nest-egg in the next year.

Politicians and environmentalists these days convey the impression that climate-change research is an exceptionally dull field with little left to discover. We are assured by everyone from David Suzuki to Al Gore to Prime Minister Stephen Harper that "the science is settled." At the recent G8 summit, German Chancellor Angela Merkel even attempted to convince world leaders to play God by restricting carbon-dioxide emissions to a level that would magically limit the rise in world temperatures to 2C.

Forget warming, beware the new ice age

The fact that science is many years away from properly understanding global climate doesn't seem to bother our leaders at all. Inviting testimony only from those who don't question political orthodoxy on the issue, parliamentarians are charging ahead with the impossible and expensive goal of "stopping global climate change." Liberal MP Ralph Goodale's June 11 House of Commons assertion that Parliament should have "a real good discussion about the potential for carbon capture and sequestration in dealing with carbon dioxide, which has tremendous potential for improving the climate, not only here in Canada but around the world," would be humorous were he, and even the current government, not deadly serious about devoting vast resources to this hopeless crusade.

Climate stability has never been a feature of planet Earth. The only constant about climate is change; it changes continually and, at times, quite rapidly. Many times in the past, temperatures were far higher than today, and occasionally, temperatures were colder. As recently as 6,000 years ago, it was about 3C warmer than now. Ten thousand years ago, while the world was coming out of the thou-sand-year-long "Younger Dryas" cold episode, temperatures rose as much as 6C in a decade -- 100 times faster than the past century's 0.6C warming that has so upset environmentalists.

Climate-change research is now literally exploding with new findings. Since the 1997 Kyoto Protocol, the field has had more research than in all previous years combined and the discoveries are completely shattering the myths. For example, I and the first-class scientists I work with are consistently finding excellent correlations between the regular fluctuations in the brightness of the sun and earthly climate. This is not surprising. The sun and the stars are the ultimate source of all energy on the planet.

My interest in the current climate-change debate was triggered in 1998, when I was funded by a Natural Sciences and Engineering Research Council strategic project grant to determine if there were regular cycles in West Coast fish productivity. As a result of wide swings in the populations of anchovies, herring and other commercially important West Coast fish stock, fisheries managers were having a very difficult time establishing appropriate fishing quotas. One season there would be abundant stock and broad harvesting would be acceptable; the very next year the fisheries would collapse. No one really knew why or how to predict the future health of this crucially important resource.

Although climate was suspected to play a significant role in marine productivity, only since the beginning of the 20th century have accurate fishing and temperature records been kept in this region of the northeast Pacific. We needed indicators of fish productivity over thousands of years to see whether there were recurring cycles in populations and what phenomena may be driving the changes.

My research team began to collect and analyze core samples from the bottom of deep Western Canadian fjords. The regions in which we chose to conduct our research, Effingham Inlet on the West Coast of Vancouver Island, and in 2001, sounds in the Belize-Seymour Inlet complex on the mainland coast of British Columbia, were perfect for this sort of work. The topography of these fjords is such that they contain deep basins that are subject to little water transfer from the open ocean and so water near the bottom is relatively stagnant and very low in oxygen content. As a consequence, the floors of these basins are mostly lifeless and sediment layers build up year after year, undisturbed over millennia.

Using various coring technologies, we have been able to collect more than 5,000 years' worth of mud in these basins, with the oldest layers coming from a depth of about 11 metres below the fjord floor. Clearly visible in our mud cores are annual changes that record the different seasons: corresponding to the cool, rainy winter seasons, we see dark layers composed mostly of dirt washed into the fjord from the land; in the warm summer months we see abundant fossilized fish scales and diatoms (the most common form of phytoplankton, or single-celled ocean plants) that have fallen to the fjord floor from nutrient-rich surface waters. In years when warm summers dominated climate in the region, we clearly see far thicker layers of diatoms and fish scales than we do in cooler years. Ours is one of the highest-quality climate records available anywhere today and in it we see obvious confirmation that natural climate change can be dramatic. For example, in the middle of a 62-year slice of the record at about 4,400 years ago, there was a shift in climate in only a couple of seasons from warm, dry and sunny conditions to one that was mostly cold and rainy for several decades.

Using computers to conduct what is referred to as a "time series analysis" on the colouration and thickness of the annual layers, we have discovered repeated cycles in marine productivity in this, a region larger than Europe. Specifically, we find a very strong and consistent 11-year cycle throughout the whole record in the sediments and diatom remains. This correlates closely to the well-known 11-year "Schwabe" sunspot cycle, during which the output of the sun varies by about 0.1%. Sunspots, violent storms on the surface of the sun, have the effect of increasing solar output, so, by counting the spots visible on the surface of our star, we have an indirect measure of its varying brightness. Such records have been kept for many centuries and match very well with the changes in marine productivity we are observing.

In the sediment, diatom and fish-scale records, we also see longer period cycles, all correlating closely with other well-known regular solar variations. In particular, we see marine productivity cycles that match well with the sun's 75-90-year "Gleissberg Cycle," the 200-500-year "Suess Cycle" and the 1,100-1,500-year "Bond Cycle." The strength of these cycles is seen to vary over time, fading in and out over the millennia. The variation in the sun's brightness over these longer cycles may be many times greater in magnitude than that measured over the short Schwabe cycle and so are seen to impact marine productivity even more significantly.

Our finding of a direct correlation between variations in the brightness of the sun and earthly climate indicators (called "proxies") is not unique. Hundreds of other studies, using proxies from tree rings in Russia's Kola Peninsula to water levels of the Nile, show exactly the same thing: The sun appears to drive climate change.

However, there was a problem. Despite this clear and repeated correlation, the measured variations in incoming solar energy were, on their own, not sufficient to cause the climate changes we have observed in our proxies. In addition, even though the sun is brighter now than at any time in the past 8,000 years, the increase in direct solar input is not calculated to be sufficient to cause the past century's modest warming on its own. There had to be an amplifier of some sort for the sun to be a primary driver of climate change.

Indeed, that is precisely what has been discovered. In a series of groundbreaking scientific papers starting in 2002, Veizer, Shaviv, Carslaw, and most recently Svensmark et al., have collectively demonstrated that as the output of the sun varies, and with it, our star's protective solar wind, varying amounts of galactic cosmic rays from deep space are able to enter our solar system and penetrate the Earth's atmosphere. These cosmic rays enhance cloud formation which, overall, has a cooling effect on the planet. When the sun's energy output is greater, not only does the Earth warm slightly due to direct solar heating, but the stronger solar wind generated during these "high sun" periods blocks many of the cosmic rays from entering our atmosphere. Cloud cover decreases and the Earth warms still more.

The opposite occurs when the sun is less bright. More cosmic rays are able to get through to Earth's atmosphere, more clouds form, and the planet cools more than would otherwise be the case due to direct solar effects alone. This is precisely what happened from the middle of the 17th century into the early 18th century, when the solar energy input to our atmosphere, as indicated by the number of sunspots, was at a minimum and the planet was stuck in the Little Ice Age. These new findings suggest that changes in the output of the sun caused the most recent climate change. By comparison, CO2 variations show little correlation with our planet's climate on long, medium and even short time scales.

In some fields the science is indeed "settled." For example, plate tectonics, once highly controversial, is now so well-established that we rarely see papers on the subject at all. But the science of global climate change is still in its infancy, with many thousands of papers published every year. In a 2003 poll conducted by German environmental researchers Dennis Bray and Hans von Storch, two-thirds of more than 530 climate scientists from 27 countries surveyed did not believe that "the current state of scientific knowledge is developed well enough to allow for a reasonable assessment of the effects of greenhouse gases." About half of those polled stated that the science of climate change was not sufficiently settled to pass the issue over to policymakers at all.

Solar scientists predict that, by 2020, the sun will be starting into its weakest Schwabe solar cycle of the past two centuries, likely leading to unusually cool conditions on Earth. Beginning to plan for adaptation to such a cool period, one which may continue well beyond one 11-year cycle, as did the Little Ice Age, should be a priority for governments. It is global cooling, not warming, that is the major climate threat to the world, especially Canada. As a country at the northern limit to agriculture in the world, it would take very little cooling to destroy much of our food crops, while a warming would only require that we adopt farming techniques practiced to the south of us.

Meantime, we need to continue research into this, the most complex field of science ever tackled, and immediately halt wasted expenditures on the King Canute-like task of "stopping climate change."

Fewer borrowers chose to take out loans for home purchases and refinancings last week even as long-term mortgage rates ended a monthlong climb, the Mortgage Bankers Association reported today.

The drop-off in activity pushed the market composite index -- a measure of mortgage application volume -- down 3.4 percent on a seasonally adjusted basis from the week before.

Applications for refinancings declined 4.2 percent from the first week of June, and the index that tracks home purchases was down 3 percent.

Borrowing costs on long-term loans were fairly calm in the latest survey, with the average contract interest rate for 30-year fixed-rate mortgages dipping to 6.6 percent from 6.61 percent a week earlier and the average rate on the 15-year fixed holding at 6.28 percent.

Costs on the one-year ARM, however, jumped from 5.48 percent to 5.7 percent during the period, boosting the ARM share of total applications to 20.3 percent from 18.7 percent a week earlier. The refi share of activity held at 38 percent, MBA reported.

Points, or loan-processing fees expressed as a percent of the total loan amount, averaged 1.58 on the 30-year loans, 1.42 on the 15-year, and 1.16 on one-year ARMs. Statistics, which include the origination fee, are based on loan-to-value ratios of 80 percent.

The Mortgage Bankers Association survey covers approximately 50 percent of all U.S. retail residential mortgage originations, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts.

Everyone seems to be into home makeovers. How could you not after watching an episode of the tear-jerking 'Extreme Makeover: Home Edition'? And do you remember 'Trading Spaces'? Is that show still on?

It seems like now the trend is all about outdoor living. One of the latest home catalogs that I received features an outdoor kitchen, complete with stainless steel grill and other cooking appliances. Of course, there's an outdoor wet bar and a beautiful dining set overlooking the lush garden and fountain. Maybe that's great if you live in California. But the East Coast humidity may just kill the fun of cooking and dining outside.

Regardless of how I feel, I can't deny that expanding living space outdoors is hot right now. Just look at the list of top searched outdoor living, the term "outdoor kitchens" is tops on our list. This definitely piques my curiosity and maybe I'll stop throwing away that outdoor living catalog!

So what have you done to expand your living space outdoors? Any tips and pointers?

Tuesday, June 19, 2007

Forecast says no recession, but 'certainly close'Tuesday, June 19, 2007

By Glenn Roberts Jr.Inman News

Turbulence.

That is the one-word title for the latest U.S. economic forecast by David Shulman of the Anderson Forecast at the University of California, Los Angeles.

"This is not a recession, but it is certainly close," Shulman writes in the forecast, released today. "If our forecast is close to the mark, the period from the second quarter of 2006 to the first quarter of 2008 will mark a historically anomalous long period of below-trend growth."

Shulman's previous quarterly forecast report, released in April, was titled, "A Long Runway for the Soft Landing."

His latest forecast anticipates a 10 percent peak-to-trough price decline in U.S. housing prices "that will likely extend into 2009."

In an interview this week with Inman News, Shulman said the current real estate downturn is "completely different from anything we've previously experienced," adding that the only comparable period may be the Great Depression.

"We've never had the run-up in house prices we saw between 2000 and 2005," and the housing-market slump is likely to be similarly unprecedented, he said.

A rise in foreclosures and the withering of the subprime lending market are still "in the early innings," he said, and foreclosure outlook is expected to get worse "well into 2008."

There may be statistical errors with U.S. gross domestic product numbers, the report notes, and recent real GDP growth may have been understated.

While some economists expected the Federal Reserve to cut the federal funds rate to prop up the ailing housing market, worries about inflation risks have perhaps taken precedent, Shulman noted in his report.

"We do not expect much help from monetary policy until the fourth quarter," Shulman stated in his report, and this "delay will push back the housing recovery until well until 2008."

His forecast calls for the Federal Reserve to cut the federal funds rate from a current level of 5.25 percent to 4.5 percent, with the reductions beginning in fourth-quarter 2007.

The rate of housing starts is expected to average 1.35 million units in 2007 and 1.43 million in 2008, according to the report.

Weakness in the housing market "is finally spilling over into consumption spending," the report states, and the U.S. economy has transitioned from "locomotive" to "caboose" among global economies.

"Today, Europe and Japan are strong and the U.S. is lagging. With the Euro-area expected to grow at 2.6 percent, the United Kingdom at 2.7 percent and Japan at 2.4 percent, our estimate of 1.8 percent (for the United States) is the laggard.

"Furthermore, China continues to grow at a blistering double-digit pace and India is not too far behind," the report states, and the global economy "is powering the stock market to new highs."

U.S. export growth, growth in business investment and especially commercial structures, and continued spending by wealthy consumers "will keep the U.S. out of recession in 2007," Shulman expects. The housing decline should be behind us by mid-2008, he states.

In a separate report focused on California, economist Ryan Ratcliff stated, "So far, 2007 has been a bit of a puzzle in the California economy. Falling sales, weak prices and rising foreclosures have continued to rule the local housing markets, and both national and state measures of construction activity suggest that real estate has been a drag on economic growth for close to a year now.

"But in spite of all this bad news from real estate, the wider California economy is mostly unfazed: job growth has slowed only slightly and we've seen only a minor uptick in unemployment."

About 27 percent of all job creation in the state from 2003-05 was from the construction sector, compared with about 11 percent from 1990-2005, the report states.

While previous forecasts anticipated "significant job loss" for the construction sector, Ratcliff notes in his report that construction has remained flat since early 2006, while the real estate finance sector "has lost enough jobs in 2006 to bring growth in financial activities to a halt."

Mortgage-related industries have seen significant job losses in the past 12 months, the report states.

Strength of the commercial building industry may have served to buoy construction employment during this residential decline, the report suggests.

Shulman also said that there may be an issue with immigrant workers in the construction industry "getting paid off the books."

Ratcliff's report expects a combination of job losses in construction and real estate finance to hit home during the rest of this year and in early 2008, pulling down overall payroll job growth in the state to less than 1 percent for the next five quarters. The report also expects a rise in unemployment to 5.5 percent.

Ratcliff states that there are some mixed signals for real estate in California, such as a decline in median sales price of about 10 percent in some counties over the past year, "but some counties have actually seen appreciation accelerate in the last six months, and median sales prices for larger geographies are universally higher."

The median sales price in the state hit an all-time high of $484,000 in April, he noted, while a home-price gauge by a government agency fell for two consecutive quarters.

Homes that have moved all the way through a foreclosure process "are rapidly approaching highs not seen since the 1990s, and several counties have surpassed their previous highs." But despite surging foreclosure sales, "resale prices have been largely unfazed," the report states.

Ratcliff expects that, based on the lengthy pipeline of mortgage resets, the state's housing market may not return to normal until mid-2009. And that return to normalcy could come as soon as mid-2008, based on historical building-cycle data, he states.

"Unfortunately, both of these perspectives argue that things in the housing market will get worse before they get better. While we don't see any calamitous implosion of home prices in the near future, this patter of flat to slight falling prices and weak sales volumes will be the norm for some time to come."

***

Send tips or a Letter to the Editor to glenn@inman.com, or call (510) 658-9252, ext. 137.

June 19 (Bloomberg) -- Home starts in the U.S. fell for the first time in four months in May as interest rates rose, suggesting the worst housing recession in 16 years will persist.

Builders broke ground on new houses at an annual rate of 1.474 million, down 2.1 percent from the prior month, the Commerce Department said today in Washington. Building permits increased 3 percent to 1.501 million.

The slump, which has lasted almost two years, is restraining economic growth even as inflation is too high for the comfort of Federal Reserve officials. Meanwhile, the average rate on a 30-year fixed mortgage has jumped to the highest in more than a year, putting pressure on first-time buyers and raising the prospect of additional defaults.

``There is still some more downside to the housing market,'' said Nariman Behravesh, chief economist at Global Insight Inc. in New York. ``Mortgage rates started up again and there is still a shakeout going on in subprime.''

Behravesh came closest to predicting the drop in starts among 68 economists surveyed by Bloomberg News. The median forecast was for a decline to a 1.472 million pace.

The housing industry is also wrestling with soaring foreclosures among subprime borrowers -- those with poor or incomplete credit histories. Lower prices and more incentives have failed to spur interest as buyers wait for bigger bargains.

Yields on Treasury notes fell and stocks were little changed. The yield on the benchmark 10-year note was 5.08 percent at 2 p.m. in New York. A six-week rout pushed the yield to a five-year high of 5.32 percent on June 13.

Weakness in West

The drop in starts was led by a 20 percent slump in the West. Construction also fell 1.6 percent in the South. Starts rose 16 percent in both the Northeast and Midwest.

Housing's recession cut 0.9 percentage point from growth in the first quarter after detracting 1.2 percentage points in the second half of 2006.

The drop in homebuilding slowed economic growth to a 0.6 percent annual rate in the first quarter, the weakest in four years. Economists surveyed by Bloomberg forecast the economy will grow 2.1 percent this year, compared with an average of 3.1 percent over the last three decades.

Borrowing Costs

The average rate on a 30-year fixed rate mortgage rose to 6.74 percent last week, according to figures from Freddie Mac, the No.2 buyer of U.S. mortgages. The increase reflected expectations of faster global growth and fears inflation would accelerate. The rate averaged 6.22 percent last month and 6.18 percent in April.

Starts were down 24 percent in the 12 months ended in May.

``The trend down is still intact,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York, who forecast a fall to 1.47 million units. ``The housing contraction is going to be a drag for the rest of the year.''

Construction of single-family homes fell 3.4 percent last month to a 1.17 million rate. Work on multifamily homes, such as townhouses and apartment buildings, increased 3.1 percent to an annual rate of 304,000, the most this year.

The increase in permits was led by a jump in multifamily authorizations. Permits for single-family homes dropped 1.8 percent to a 1.05 million annual pace, the lowest since July 1997.

``We continue to see a deterioration in demand for single- family homes, and so it looks like there's more downside to go for the housing market,'' said Tim McGee, chief economist at U.S. Trust Corp. in New York.

Unsold Homes

Record levels of unsold homes suggest the slump is far from over. Fed policy makers now acknowledge the housing recession may linger longer than previously forecast.

``The adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected,'' Chairman Ben S. Bernanke said June 5.

A record number of Americans were at risk of losing their homes last quarter because they couldn't make payments as interest rates rose and growth slowed, according to a report last week from the Mortgage Bankers Association. The share of all mortgages entering foreclosure rose to 0.58 percent from 0.54 percent in the fourth quarter.

The failure of at least 50 subprime lenders, who make loans to consumers with poor or limited credit history, combined with the increase in foreclosures has raised concern more homes will be thrown back on the market.

Subprime

Some banks have made it more difficult for borrowers to qualify for a mortgage in the wake of the subprime debacle. Add the jump in rates, and affordability has taken a hit.

Declines in sales, construction and prices this year are going to be steeper than previously thought, the National Association of Realtors said June 6, in its fourth forecast revision this year. Housing starts are likely to fall 21 percent to 1.43 million from 1.8 million last year, the group said.

Sales of previously owned homes probably will tumble 4.6 percent to 6.18 million and the median price likely will fall 1.3 percent to $219,100, the Chicago-based trade group said. A month earlier, the association projected 2007 home sales to decline 2.9 percent. Sales of new homes will fall to 860,000 from 1.05 million last year, the group said.

A report yesterday showed builders turned more pessimistic this month. The National Association of Home Builders/Wells Fargo sentiment index dropped to 28, a 16-year low, from 30 in May. Readings below 50 mean most respondents view conditions as poor.

`Really Worried'

``Builders are really worried now, not only by the credit tightening in the mortgage market, but now all of a sudden by an increase in the fundamental mortgages as well,'' David Seiders, chief economist at the National Association of Homebuilders, said in an interview yesterday.

Hovnanian Enterprises Inc., New Jersey's largest homebuilder, last month reported its third consecutive quarterly loss as it cut prices and wrote off land options while sales continued to plummet.

``Without a doubt, things have slowed since about March,'' said Ara Hovnanian, the builder's chief executive officer in an interview yesterday. ``There is not a recovery that is about to happen.''

To contact the reporter on this story: Bob Willis in Washington bwillis@bloomberg.net

I have lived in the Washington, D.C., metro area for almost 10 years. That is an eternity for me! I used to move every four to five years. So once in a while, I get the itch to look at other cities and states to see what's out there. But for one reason or another, I always end up staying here.

I was curious to see what states people search for when they're looking to move. It's no surprise that Florida real estate and North Carolina real estate are at the top. The warm weather and low cost of living certainly help. It could also be people looking for a second home. However, I was surprised to see that Maine real estate made it second on the list -- is there something about Maine that I don't know about?

For now, I think I'll stay in the D.C. area since it is a nice place to live. The humidity doesn't bother me and there are plenty of good restaurants around. People are generally friendly -- probably those Southerners who moved up north (although technically Washington, D.C., is in the south). Most importantly, my family and friends are in the area, and that's a huge incentive to stick around here.

How about you? Do you constantly look at real estate in other states? If you recently moved out of state, why did you move? Or, maybe you have your own list of states you're checking out ... if so, please share!

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You can find great local Dublin, Ohio real estate information on Localism.com Vito Boscaino is a proud member of the ActiveRain Real Estate Network, a free online community to help real estate professionals grow their business.